When do you not pay tax on property income?

There are tax planning opportunities when investing in property and considering tax liabilities on rental income you receive. Here are some examples where no tax is payable on rental income or gains.

Investment versus Trading

It's important to understand the difference between investment and trading when it comes to property. Investment means buying property for the rental income it generates, and it's generally a long-term strategy. A property bought purely for very long-term capital growth or as premises from which to operate can also be considered an investment property. Pension funds or charities should not trade in property, but they can invest via companies that trade.

Pension Funds

Pension funds come in different types, and most people are likely to have some involvement in a pension arrangement. Investing in commercial property through a pension fund can be a good idea, but residential property is generally not acceptable. Real Estate Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs) are two options that pay no tax on the income and gains generated from their property investment portfolios.

Main residence capital gains tax (CGT) exemption

An important capital gains tax (CGT) exemption applies to main residences, but there are complications when it comes to owning multiple residences or buying properties with the main objective of selling at a profit.

Non-UK residents are now subject to tax on residential and commercial property gains, but gains accrued up to April 2015 for residential property and April 2019 for commercial property can avoid tax.

Other options

Individuals can avoid tax on property income by owning shares in a UK REIT or certain PAIFs through an ISA.

Finance costs have increased significantly recently, and landlords may not be able to pass on the extra cost to tenants. The position for individuals depends on whether they are letting residential or commercial property, with only basic rate tax relief allowed for residential property.

Furnished holiday lettings are an exception where finance costs are fully deductible. Trading is different from investing, and finance costs incurred as part of the funding of a property required to buy and sell on can be set off against any trading profit on sale.